Money Mondays: Apple, a Technology Powerhouse

The makers of the iPad and iPhone have been all over the news this week after a so-called “bad quarter,” and the stock fell about 5% for the week. Did the company lose a lot of money?
You might think so, but no. Apple didn’t lose a dime. In fact, it made a ton of money in the quarter–$8.8 billion in profits to be exact. Not only that, it made more money than it did in the same period last year. Last year’s comparable profits were $7.31 billion, so it actually made 20% more this year. The company will have some of the highest quarterly earnings of any company in the world this year.

It’s making tons of money and it made more money than it did last year. So why would people be dissatisfied?
It’s because the stock market is based on expectations. Apple’s growth was really good compared to other companies, but it wasn’t up to the incredible standards Apple had set for itself. You see, last quarter Apple showed a 94% growth in profits from the year before. That dropped to 20%–and Wall Street Analysts had been expecting 31% growth.

Look at it this way given that it is Olympics season. Say in London Usain Bolt runs the 100 meter dash in 9.9 seconds. The announcers will say that he ran a terrible race. But frankly, there are very very few people in the world who can run that fast. You see, Bolt’s personal record is 9.58 seconds and he is expected to finish in sub-9.8 second territory.

Is it normal for a company to receive so much attention when it doesn’t meet expectations?
Yes and no. When a company misses expectations, chances are it will fall—but this was a pretty big drop for a miss of its size. It’s a “the bigger they are, the harder they fall” situation. This last earnings report was only the second time in 39 quarters that Apple has missed profit and revenue expectations. That is an amazing record, and people were really surprised to see it happen. Apple got punished harder than most companies would have in that situation, because people came to view the company as invulnerable.

It doesn’t seem like the worst problem to have if you’re running a business. Has anyone been able to determine why Apple’s profits didn’t meet expectations?
Lower iPhone sales are the dominant reason. Apple shipped 26 million iPhones this past quarter. Now that’s a ton of phones, even compared to previous years, but it is down 26% from the previous quarter. Lower shipments of the iPhone hurt the company’s ability to bring in revenue, even with help from other sources. Apple shipped 84% more iPads than the same time last year and 44% more iPads than last quarter, but it wasn’t enough to make up the difference in expectations. The quip you hear is “as the iPhone goes, so goes Apple.”

Global economic concerns also played a part. Europe is really struggling right now. The 27 countries that make up the European Union actually represent the largest economy in the world, so it makes sense that problems there have an impact on Apple. European consumers are afraid of what lies ahead, and this has caused them to change their spending habits in the short term. This lower consumer demand caused Apple to miss its sales expectations for the continent.

Is Apple a buy, sell, or a hold?
That’s the $500 billion question. Indeed, that’s roughly the value of Apple on the stock market. First, let’s be clear: Apple is an amazing company. No company has been able to create a voracious desire for gadgets—and then fill that desire—the way Apple has. It is also a money-making machine. Apple has $117.2 billion in cash on the balance sheet, which means they could hypothetically buy Amazon.com and have about $17 billion left over.

I would also say that by some metrics, the stock is not all that expensive. Professionals use something called a P/E ratio, which basically measures how much you’re paying for each dollar of profit a company makes. And on that metric Apple is no more expensive than the market.

Still, I can live without it in my portfolio. As we just saw, expectations are so high that results which would be phenomenal for other companies cause Apple’s stock to drop. I frankly don’t know whether its growth will return to historical levels or whether it will slow down, but my preference is for companies with low expectations, not high ones.